U.S. banks delivered a standout Q1 - earnings per share growth came in north of 20%, beating the consensus estimate of 15%, with all six major banks exceeding expectations. In this video, Brendon Sattich, Portfolio Manager, North American Equities, breaks down what drove that performance, why short-term headwinds like geopolitical uncertainty are creating a moment of pause rather than a reason for concern, and where the real long-term opportunity lies.
Watch time: 4 minutes, 22 seconds
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Brendon Sattich, CFA - Portfolio Manager, North American Equities
So I'll start first with a recap on U.S. bank results, and firstly, what I would say is that they were quite good. So coming into the quarter, consensus was looking for earnings per share growth of 15%. And actually it came in north of 20%, and all of the large six U.S. banks exceeded expectations. So really, what we saw here was a very strong trading environment.
Fixed income, equity trading, derivatives - all doing very well in this sort of volatile environment. But importantly, some of the key KPIs that I look at as well, in terms of loan growth, efficiency, other fee income businesses, those are pretty strong in aggregate as well. So in summary, I'd say that Q1 results from the U.S. banks were actually quite good.
So then as we sort of think about the next year for U.S. banks, there's a few factors to consider, I'd say. Number one, just right now, there is a lot of uncertainty in the world. Geopolitical uncertainty in the Middle East, high oil prices. One thing this is really doing is kind of putting a bit of a damper on corporate confidence.
So, as you think about the investment banking businesses of the U.S. banks, what they're saying is there's a large backlog of activity - but corporates aren't fully exacting on this opportunity yet. They're still waiting for a little bit more certainty, a bit more resolution. So, this business in the short-term could be slightly tempered versus long-term averages.
That said, there are a few reasons to be optimistic as well in the short-term. Firstly, I would say that credit quality, despite some of the headlines that we get on private credit, is actually quite good. The consumer is in good shape; corporations are in good shape. Everybody's paying their bills. So as you think about the credit quality risk for U.S. banks, it seems kind of well measured and not too much to be concerned about right now.
The other thing I would point out is lending growth. Think about lending to corporations, small and medium-sized businesses - that's actually starting to pick up. That's important because U.S. banks generate a lot of their revenue from lending income as well, so that seems to be on a good trajectory. And then interest rates are kind of in a sweet spot whereby banks can still earn a good spread from high interest rates, but they're not prohibitive such that they're kind of contracting economic activity in the U.S. and abroad.
So all in the short-term, if you're running a U.S. bank right now, the in aggregate looks pretty good.
So as we think more longer term about the sector, this is where our scenario work, our valuation considerations, really come into play. There are a few things that I consider here. Number one, I think there's a really good case to be made that for the sector, in aggregate, returns on capital should be moving significantly higher over time.
Why is this? Number one, I would just say that business mix is shifting. So, banks are really reorienting more towards higher fee income businesses like wealth management, credit cards, certain areas of investment banking, payments - all these areas that are kind of high growth and higher return for these companies. Number two would be capital.
So in the U.S. we've gotten a lot more certainty on the kind of end game of capital proposals. So this allows banks to more properly allocate their capital with more certainty. I think over time we'll just allow them to do more buybacks, potentially higher dividends, and have more of a disciplined capital regime as it relates to running their businesses.
Then the third one would be AI and technology. We think here, this is a big opportunity for banks to become more efficient, to sort of reorient their staff count, their processes, and really just get more out of their resource base, and over time really just become much more efficient entities. So all this to say is, when we do our medium term scenarios, we think that there's a good chance that returns on capital in the future for the sector in aggregate could be much higher than they are today, and that's why we feel comfortable with current valuations on the sector.
Key Takeaways
Q1 U.S. bank earnings came in well above expectations. Earnings per share growth exceeded 20% against a consensus estimate of 15%, and all six of the large U.S. banks beat analyst forecasts – driven by a very strong trading environment across fixed income, equities, and derivatives.
Short-term uncertainty is creating a pause, not a problem. Geopolitical tensions and high oil prices are weighing on corporate confidence, which is tempering investment banking activity in the near term. However, credit quality remains solid – consumers and corporations are in good shape and meeting their obligations.
Lending growth and interest rates are working in banks' favour. Loan growth to corporations and small and medium-sized businesses is picking up, and interest rates are sitting in a sweet spot – generating strong spreads for banks without constraining broader economic activity.
Business mix is shifting toward higher-return, higher-growth areas. U.S. banks are increasingly reorienting toward wealth management, credit cards, payments, and select investment banking businesses – a structural shift that supports stronger and more sustainable returns on capital over time.
The long-term case for the sector is building. Greater capital allocation certainty, the potential for increased buybacks and dividends, and meaningful efficiency gains from AI and technology all point toward returns on capital moving significantly higher – supporting comfort with current sector valuations.